Generational Wealth: What Is It and How to Build It

Assets transferred by older generations of the family to their children or grandchildren are referred to as generational wealth. The generational wealth definition covers anything that has monetary value and is passed down from one generation to the next. But while generational wealth can remove any financial constraints for its recipients, it also contributes to the racial wealth gap.       

The following article takes a closer look at the significance of generational wealth, how to build it, and its long legacy of widening the gap between the haves and have-nots.

Generational Wealth Definition

Generational wealth describes financial assets passed down to younger generations such as stocks, real estate, cash, and even entire businesses. This can occur after the death of family members or while they’re still alive. And while most inheritances in the US are modest, the bulk of the total value of generational wealth transfers is attributed to the wealthiest households.  

The most basic form of generational wealth transfers involves parents passing down money to their children. This ensures a soft landing for the recipients who can use it to propel a business or secure an elite education. Here are some examples of how generational wealth is used:

• Parents assist their children with a deposit to secure a house or another type of property.
• Parents use the money they have saved over the years to fund their children's education, thereby increasing their future earning potential.
• Parents use their capital to fund their children's business dreams and help them reach their goals.

In all of these cases, generational wealth is used as a stepping stone to elevate the younger generation. The money that makes this possible has been earned and saved by a previous generation.

This is perhaps the simplest generational wealth definition. It’s the means by which the older generation assists the younger generation in reaching future financial goals.

Generational Wealth and Inequality

It’s no secret that wealth is unevenly distributed throughout the United States. And according to the latest data, generational wealth transfers play an important role in giving a significant advantage to white households in maintaining and building wealth. 

This generational wealth gap between white communities and people of color has only become more extreme in recent years, with notable discrepancies in everything from access to health and education to income and opportunity. A closer look at the raw numbers highlights the importance of inheritance in this equation. 

In 2019, white families had a conditional median expected inheritance of $195,500. Meanwhile, Hispanic families expected a median inheritance of $150,000, while black and other families looked forward to only $100,000.

Only 10.1% of black families and 7.2% of Hispanic families actually received an inheritance, while that figure is notably higher (29.9%) among white households.   

In some circles, this is referred to as white privilege. Simply put, belonging to a certain race shouldn’t translate into financial superiority. But historically, white communities have had more opportunities than others, which ensures the preservation of generational wealth inequality.

There is no shortage of examples to support this argument. The co-founder and CEO of Meta Platforms (formally Facebook), Mark Zuckerberg, reportedly got a $100,000 cash injection from his father when he was starting out. Jeff Bezos’s parents were important investors in Amazon, and Elon Musk was born into a wealthy South African family.        

In short, if aspiring entrepreneurs lack access to elite social circles or the means to educate and elevate themselves, it’s very difficult to start building wealth.

Why Is Generational Wealth Important?

Generational wealth gives parents the financial ability to equip their children for the future. It helps recipients overcome any constraints associated with starting a business or even getting a quality education. This, in turn, paves the way for higher income and enables new generations to build their own wealth. 

Another important effect of generational inheritance is the mindset that it fosters among those on the receiving end. If entrepreneurs know they can rely on family money, they’re more inclined to jump into riskier and potentially lucrative investments. 

On the other hand, individuals who come from low-income backgrounds have a far more cautious decision-making process and often lack the risk-taking abilities that created many of the world’s most successful businesses.      

As such, generational wealth is an important springboard. It takes younger people who might otherwise be starting from zero a few steps up the financial ladder, which makes it exponentially easier to begin building their own wealth.

How to Build Generational Wealth

By now, you probably realize that starting from zero is a lot harder than inheriting the assets needed for a secure financial future. That said, it’s entirely possible to accumulate extra money over time that you can pass down to your loved ones.

Building generational wealth begins with careful planning. You need to know exactly where you stand financially, what your objective is and how to get there. This allows you to create a road map for your investments and savings so that you can reach your financial goals. The less you have when you start, the more aggressive your strategy needs to be.

Maslow's hierarchy of needs can be used as a framework to help you form the right strategy. Maslow created a motivational model in the form of a pyramid that features a hierarchy of needs. 

When we start building wealth, we can use this valuable assessment tool, which is designed to help individuals reach self-actualization.       

• Right at the bottom of Maslow’s pyramid are physiological needs. From a financial standpoint, this can refer to spending our money on things we need to survive, like food and shelter. You’ll need to have those things taken care of before you can start planning a generational wealth transfer.
• Next on Maslow’s pyramid is safety and security. Financially speaking, this would be your savings for a rainy day, which should be your next priority. 
• The next layer on Maslow’s pyramid is love and belonging. This is the point at which you can afford to belong to exclusive clubs, socialize with friends, host dinner parties, or go on group vacations
• Next up is esteem, which is where you attain a certain status because of your financial achievements, so instead of having just a small house, you might opt for a larger, more luxurious place.
• Eventually, Maslow’s pyramid reaches the self-actualization part, which in a financial sense refers to starting your own business or sending your children to college so they can improve their chances in the future.

Of course, the further up the pyramid you start, the easier it is to reach the top. This is where the concept of generational wealth comes into play.

When you are planning generational investments, you must take care of the lower levels of your financial pyramid first. Make sure that the basics are covered before you start thinking about status and luxury.

How to Grow Your Money

There are a number of strategic maneuvers that you can conduct in order to improve your financial situation in the long term:

• The stock market: This is a good place to invest your money. But bear in mind that stocks are a long-term investment and not a get-rich-quick scheme.
• Property: Real estate is always a clever investment, and in some cases, the returns are instant. And given the current state of the global economy, there's never been a better time to invest in property.
• Start your own business: You probably already know that it's easier to become wealthy as your own boss than it is working for somebody else – it’s also riskier, but with great risks come great rewards.
• Invest in education: Whether it's to upskill yourself to earn more or invest in your children's future, education is a great way to invest your money.
• Invest in smart insurance plans: Whether it's a life insurance policy or a policy that covers you in the event of illness or injury, the right kind of insurance is critical to building generational wealth.
• Some people have created wealth by investing in cryptocurrencies or in short-term currency trading, and while this can quickly increase the amount of money you have, it can also lead to huge losses.

Of course, everyone has a different risk profile, a different goal, and a different comfort level. So, whether you're investing a few hundred dollars a month into stocks or dumping tens of thousands into real estate, there's no one-size-fits-all strategy.

If you want to build generational wealth and you don't know where to start, the best thing you can do is speak to a professional financial planner. They will take your current situation, your future goals, and your appetite for risk into account and point you in the right direction.

Also, bear in mind that your financial needs and strategy will have to evolve overtime based on your income and many other factors. So, it's important to adjust your plan as your life changes.

Estate Planning for Generational Wealth

It's one thing to build generational wealth for your children and grandchildren, but it's quite another to ensure that they get the most out of that wealth.

That’s why it's important to ensure that you have proper estate planning in place. This might mean something like setting up trust funds for children and grandchildren, financial gifts to your children and grandchildren while you are still alive, or something as simple as having an up-to-date and valid will.

Nobody wants to think about things like this, but when it comes to ensuring that your wealth can benefit your family, these are critical factors to consider.